Tagged: power law

Hollywood in Extremistan

In The Black Swan, Taleb originally explained Mediocristan and Extremistan to describe how many pundits, scholars, and participants had mistakenly believed that the finance industry followed a Gaussian distribution when it actually followed a Zipf-Mandelbrot power law.

Physical measurements in the world tend to have Gaussian distributions, “to live in Mediocristan,” but other domains, like finance, follow power laws, and “live in Extremistan.” In Mediocristan, the average weight of 100 random Americans won’t change much by adding the heaviest American into the sample as the 101st observation. Conversely, in Extremistan, the average income of 100 random Americans would change drastically by adding Bill Gates into the sample as the 101st observation.

Although it’s not commonly understood or discussed, Hollywood also lives in Extremistan. Successful studios, production companies, and freelancers all adopt barbell strategies.

In financial investing, a barbell strategy is a strategy in which an investor places a majority of the portfolio, maybe 90% to 95%, into extremely non-volatile assets like T-bills, CDs, cash, etc., and a minority of the portfolio, maybe 5% to 10%, into highly risky assets like stocks, venture capital, or futures.

In the financial domain, Taleb advocates for the barbell as a way of dealing with Black Swans–unexpected yet highly impactful events–by both hedging against negative Black Swans and profiting from positive Black Swans. In an extreme barbell strategy, the non-volatile majority of the portfolio might sustain small and steady losses in a bull market because T-bills wouldn’t beat the rate of inflation. T-bills are also insulated from recessions and will outperform bear markets. In both bear and bull markets however, some of the assets in the risky, volatile portion of the portfolio will sustain losses, but such losses are bounded and acceptable. The upside on the risky assets is effectively unbounded, so the highly profitable bets cover the losses for the rest of the portfolio.

What does all this mean for Hollywood? The barbell strategy is widespread.

Errol Morris, even after having won an Oscar for The Fog of War, still enjoyed and continues to enjoy working on commercials.

It’s very typical in Hollywood for client work to serve as bread and butter. Invoicing for client work is usually fee-for-service, and filmmakers don’t expect, require, or depend on any particular clients’ product enjoying runaway success.

Specialists in Hollywood are creatives though, and join the industry because they love creating. The scrounge, toil, and pull favors to make their passion projects, some of which do enjoy runaway success.

Hollywood lives in Extremistan because the physical inputs–development, pre-production, production, post-production, and marketing and distribution–are only very tenuously related to the outputs–tickets, views, à la carte VOD purchases, subscribers to subscription VOD services, etc.

Even though Hollywood’s finances are severely obfuscated, assume that the Pareto principle is in play, that 20% of films and shows generate 80% of the revenue. Matthew Ball and Prashob Menon explain that revenue has been stagnant and fragmentation of the industry has intensified.

In Vanity Fair, Nick Bilton explains how the inefficient Gaussian aspects of the industry are about to get squeezed. Silicon Valley is about to make Extremistan even more extreme.

Advertisements

“Big” industry

Have you ever noticed the popular disdain for large companies or industries? Those on the left often throw out an ipse dixit that large companies are intrinsically nefarious, including but not limited to:

  • big oil
  • big pharma
  • big banking
  • big business
  • big tobacco

There’s also mistrust of “big” industries among the right. Breitbart’s branded media properties imply a distrust of:

  • big government
  • big journalism
  • big Hollywood

Shortly before he died, Andrew Breitbart had also planned on some coverage of “big education.”

I don’t know if Breitbart’s explicit strategy was to piggyback on the left’s branding of the modifier “big” as obviously derogatory, but the derogation of “big” industry is popular enough for Breitbart’s readers to expect critical coverage and commentary about government, journalism, Hollywood, etc.

The principle underlying mistrust of “big” industries has to do with perceived power imbalances. Corporate personhood is offensive because it seems to be a contradiction in terms. Individual people seem accountable, but corporations seem faceless. You can complain to your village’s blacksmith, but you can’t complain to a Fortune 500 company. Facelessness implies Kafkaesque bureaucracy and a lack of control.

By nature we’re comfortable navigating personal relationships at a local level, bound by Dunbar’s number. When dealing with familiar clansmen at a local level, we can vie for resources, reputation, status, etc. We feel empowered when we’re dealing with such local relationships. We learn who will help us and who will hurt us.

As against the evolutionary environment of our ancestors, today we participate in an economy many orders of magnitude larger than what can be entirely contained within the scope of Dunbar’s number. We don’t understand supply chains. Products arrive to us as if by magic. We feel less in control.

Organizations in modern commercial society scale by a power law. Ancestral, evolutionary economies weren’t so liberated, and couldn’t command nearly as many resources in an orderly way.

Our intuitionist brains haven’t caught up. The cognitive toolkit we’ve inherited was suitable for navigating pre-commercial Gaussian environments, but the mental model breaks down in explaining modern commercial society. We mistakenly attribute “big” industries as existing in a Gaussian context, when many actually exist in a Mandelbrotian one. A big industry in a Gaussian context is intractably predatory, because it implies zero-sum gains. A big industry in a Mandelbrotian context is no more threatening than anything else in day-to-day life, because it delivers familiar goods and services that are obviously replicable.

When Marx examined the Industrial Revolution, he was limited by a Gaussian paradigm. Looking backwards, he noticed that feudalism was Gaussian and zero-sum, but couldn’t yet see that capitalism was fundamentally different. Only later would we understand that capitalism has Mandelbrotian elements.

In capitalist Mandelbrotian environments, we can suffer from or benefit from Black Swans.  In feudalist Gaussian environments, we’re trapped in poverty, divvying up resources politically.

When you hear an industry derogatorily described as “big,” resist the heuristic that deems that industry Gaussian and therefore nefarious and predatory. Don’t rely on a cached thought.